Archive forOctober, 2012

So the Magic Kingdom and The Galactic Empire are to join ‘forces’ in a $4 Billion deal. While it appears to make commercial sense for both sides will we be able to cope with the reworking of the franchises? Will it be a case of ‘Snow White and the Seven Jedi Knights’ (not sure about the censor’s rating on that) or ‘Revenge of the Muppets’ (a light-hearted look at death and destruction as a band of hand puppets take on Darth Vader) – the variations, God help us, look endless.

Japan’s manufacturing Purchasing Managers Index (PMI) declined to a seasonally adjusted 46.9 in October, from 48 in September, due to faltering exports and slowdown in domestic demand. The output component of the PMI fell to 46.4 in October from 47.1 the previous month.

The park feels a bit empty when someone, particularly the size of Wall Street, doesn’t come out to play. Late last night local time, ‘post-tropical cyclone’ Sandy was reported to be within 10 miles of Philadelphia. The Liberty Bell is already cracked so we must hope it won’t suffer further damage.

Japan’s industrial output fell 4.1% in September, the sharpest decline since the aftermath of last year’s earthquake, the Ministry of Economy, Trade and Industry said today. Markets had forecasted a 3.3% decrease. In price-adjusted real terms, household spending unexpectedly dipped 0.9% y-o-y in September, the first decline in eight months, much worse than the 0.7% gain forecasted by economists.

Here’s hoping that the 60 million residents along the U.S. East coast and inland get off lightly as Hurricane Sandy blows in with wind speeds hitting 75 miles per hour. A special set of conditions, including a full moon, could result in a tidal surge of eleven feet or more. The storm system’s winds are a mind-boggling 500 miles across and influencing an estimated area of around 1,000 miles in diameter, making it one of the largest storms ever to hit North America. Given the huge potential for damage, this has prompted the large-scale evacuation of people and the cancellation of equity trading on all U.S. exchanges today.

Charles Bean, Deputy Governor at the Bank of England, said UK’s growth could be weak in Q4 and over-optimism surrounding previous week’s GDP data was unwarranted. Economic growth in Q3 2012, as against a contraction in the previous quarter, was partly due to growth in ticket sales during the London Olympics and a rebound from Q2 2012, wherein an extra public holiday dented output.

Thankfully, U.K. third-quarter GDP came in positive and, at plus 1% quarter-on-quarter subject to revision, ahead of consensus estimate. Of this, an estimated 0.2% was due to the one-off boost from the Olympics (which, presumably, we won’t be hosting again this year). As much as another 0.5% could have been due to bounce-back after the impact of the Queen’s Jubilee Holiday in the second quarter. This leaves about 0.3% growth which may be enough to prompt the Bank of England not to extend Quantitative Easing in November but may not stop the economy turning negative again in Q4. We travel hopefully but, realistically, growth and a return to more normal levels of economic performance are going to be hard won. The FTSE 100 Index closed all square at the day’s end.

Japan’s cabinet announced a ¥750bn (US$9.4bn) stimulus in a bid to end deflation and spur faltering economic growth. The emergency spending package would also support the lost momentum from reconstruction in the country devastated by earthquake and tsunami last year. Separately, Japan’s Core Consumer price Index (CPI) fell to -0.1% in September, a straight decline for the fifth month, fuelling speculation that the Bank of Japan would take steps to ease monetary policy at its 30th Oct meet.

Despite the Prime Minister’s denials, David Cameron virtually let the cat out of the bag in parliament yesterday that today’s release of the U.K. GDP number for the third quarter would show an encouraging return to growth, implying an end of the recession after the two previous quarters of contraction. For someone desperate for any good news, he may be forgiven for exaggeration because the markets are already assuming Q3 growth of around 0.6% to 0.8%, compared with the previous quarter, to leave the year-on-year trend for the economy at around minus 0.5%.

In a closed-door meet with German parliamentarians, European Central Bank (ECB) President Mario Draghi defended his plan to buy government bonds with a warning about deflation risks. Draghi reaffirmed that Outright Monetary Transactions would not lead to inflation. In a separate development, Greece announced that the country has been allowed more time by international lenders to implement austerity cuts.

It has to be said, yesterday turned out to be quite a poor one for markets as the weight of negative pointers finally dragged down sentiment. The S&P 500 and FTSE 100 indices both fell by 1.44% with the Euro Stoxx 50 and DAX indices both 2.1% lower. The stand-out exception was Hong Kong which was closed for a holiday. After a small drop this morning, the Hang Seng Index has continued its breakout, as we identified two days ago, and has closed 0.3% higher today at the 21,764 level.

Manufacturing activity in the world’s second biggest economy seems to be showing signs of recovery. Preliminary reading of the HSBC/Markit Flash Manufacturing Purchasing Managers Index (PMI) for China improved to 49.1 in October, a three month high, from 47.9 in September. There have been noticeable improvements in various components like new orders (particularly export orders), output, inventories and prices charged. The PMI reading is positive considering that China’s economy has slowed for seven consecutive quarters till Q3 2012.

The S&P 500 Index, at just under 1,434, is balancing on a knife-edge. Technical analysts variously point to the index being close to breaking down through the 50-day moving average or through the trend line in place for the last five months since early-June. As Wall Street contends with third-quarter corporate results, some good-some bad, this is a battle front for the soul of the markets.

This morning in London has really evoked John Keats’ resonant line ‘Season of mists and mellow fruitfulness’ to depict the onset of Autumn – the Fall – as the City’s buildings hover, half-seen, in the moisture-heavy air. As markets continue to twist and turn, it’s good to have a little lyricism to draw on from time to time. Whether the markets can be described as lyrical is another issue but what is clear is that the underlying rhythm is a staccato as corporate results and economic releases switch between well-received and diabolically disappointing.

Japan experienced its highest fall in exports since the earthquake that occurred last year; the decline was due to the impact of increased tensions over the Diaoyu Islands on Japan-China trade ties. Japan’s exports slumped 10.3% in September, leading to a trade deficit of ¥558.6bn. Shipments to China and the EU declined 14.1% and 21.1%, respectively. However, exports to the US grew 0.9%. Imports rose 4.1% driven by increased demand for oil and liquefied natural gas. Separately, the Reuters Tankan manufacturers’ sentiment index for October came down to -17, its lowest level since 2010, indicating mood among manufacturers in Japan remains pessimistic.

After yesterday’s events, there is a distinct possibility that the verb ‘to google’ – that is, to use the Google search engine to obtain information on the World Wide Web – will take on a new meaning, at least in the minds of those involved in U.S equities. Given its passing similarity to the word ‘juggle’ , a form of redefinition could be ‘to drop a ball unintentionally, with dramatic consequences’.

Foreign Direct Investment (FDI) inflow to China declined 6.8% y-o-y to US$8.4bn in September, the Ministry of Commerce said today. FDI inflows totalled US$83.4bn during January 2012 to September 2012, down 3.8% over the same period last year. In the last nine months of the year, investment inflows from the European Union dropped 6.3% y-o-y, while investment by US firms fell 0.6%. China drew US$116bn in FDI last year; its monthly highest tally was US$14bn in December 2010.

European leaders are due to convene in Brussels for the latest Summit, scheduled to run over the next two days. It had been hoped that this event would bring crystallisation on the debt positions of Greece and Spain but there are now some doubts that this will be the case. Furthermore, given that bond yields for Spanish and Greek sovereign debt have eased in the past 48 hours, the pressure on delegates to make progress on the longer term issue of the banking union for Europe would appear to have eased in the short term. For markets, it is important that a sense of constructive activity emerges.

China’s economy grew 7.4% y-o-y in Q3 2012, matching market estimates, but coming in below the official target, the National Bureau of Statistics said today. GDP grew 7.7% y-o-y in the first three quarters, and the government is targeting growth of 7.5% for the full year. Separately, industrial production rose 9.2% y-o-y in September, rebounding from a three-year low of 8.9% in August. Retail sales also surged 14.2% y-o-y in September, the highest level since March.

The global recession is making its impact on popular food operations in interesting and varied ways. According to a report on Bloomberg this morning, the company behind coke (as in dark, fizzy) in Greece and the world’s second-largest coke bottler, Coca-Cola Hellenic Bottling, is to move its stock market quote from Athens to London next year. Apart from the implied loss of liquidity, it is expected to leave the Greek stock market smaller than Vietnam’s.

Moody’s retained Spain’s investment grade credit rating at Baa3, but assigned a negative outlook for the country. The ECB’s keenness to assist with bond purchases, and Spain’s reform efforts were the key reasons why its rating was not downgraded to junk status. The agency believes Spain would seek an Enhanced Conditions Credit Line from the European Stability Mechanism (ESM) as a precondition to the ECB triggering its Outright Monetary Transactions program.

In the event, Wall Street took heart from the September retail sales figures which showed a gain of 1.1% on August and against expectations of 0.8%. Sentiment was also boosted by above-expectation third quarter results from Citigroup which reflected strong fixed income trading revenue growth and more evidence of cost-cutting at the banking group. The shares closed 5.5% higher, helping the S&P 500 Index to a 0.8% rise on the day.

German Chancellor Angela Merkel reaffirmed finance minister Wolfgang Schaeuble’s sentiment by explicitly ruling out the possibility of a Greek insolvency or Eurozone exit. Germany looks all set to grant Greece the two extra years it is seeking to meet deficit reduction targets. Meanwhile, Greek Prime Minister Antonis Samaras yesterday expressed confidence about receiving the next tranche of aid.

In the past few months, the mindset of equity markets has shifted from ‘even bad news is good news’ (on the basis that news bad enough would force policymakers’ hands to inject stimulus) to an ‘even good news is not good enough (to lift markets)’ mentality. While the current attitude might look healthier and more normal to a market psychologist, it still suggests that we are in a mini-bear phase rather than just another short-term trading decline as the perception of a deeper global economic slowdown takes hold. Markets generally closed around 2% last week as investors appeared to ignore potentially good news.

China’s annual consumer price inflation inched down to 1.9% in September, from 2% in August, the National Bureau of Statistics said today. Also, the producer price index declined 3.6% y-o-y in September, in line with market forecasts. Separately, China’s exports jumped 9.9% y-o-y in September, beating the consensus forecast of 5.5%, while imports rose 2.4% y-o-y, the customs administration said on Saturday.

Rather like trying to pin down Lewis Carroll’s grinning, disappearing and reappearing, Cheshire Cat, identifying the prominent relevant drivers behind Thursday’s market action is tricky. European markets and the FTSE 100 staged a spirited rally yesterday on the growing perception that regulatory requirements for banks might be eased to counter the impact of austerity measures. In a similar vein, the pace of austerity implementation in the face of weak economic activity was questioned by I.M.F. head Christine Lagarde at a meeting in Tokyo alongside the gathering of European Finance Ministers, much to the consternation of Germany’s Finance Minister, Wolgang Schauble.

Yesterday, the IMF Managing Director Christine Lagarde said that Greece should be granted two more years to reach its budget goals and echoed sentiment that too much austerity too fast can damage the country’s economy. This comes after the IMF released a bleak outlook for Greece, estimating that its public debt would rise to 171% of GDP this year. Separately, the country’s unemployment rate reached a record high of 25.1% in July, up from 24.8% in June.

For many Wall Street-watchers, the Dow Jones industrial Average Index (DJIA) has at times carried a mystical status after years of association with big events in the history of the market, the nation and the world. However, today’s more statistically sophisticated investors generally recognise that using an index which is share price-weighted and based on the shares of just 30 companies is, at best, a shorthand indicator for the market. It is for this reason that the much broader average market capitalisation-weighted Standard and Poor’s 500 Index is referred to for what should be a more accurate view of what is going on in U.S. equities. That said, a fall of over 100 points in the Dow can still feel quite emotive and still tends to catch the eye.

S&P lowered Spain’s long-term sovereign credit rating by two levels to BBB- from BBB+ with a negative outlook, citing the country’s deepening recession, significant risks to budgetary performance and lack of clear direction in Eurozone policies. Separately, Greece’s industrial output rose 2.5% y-o-y in August, its first positive reading since the debt crisis began in April 2008, statistics agency ELSTAT said yesterday.